A Blackstone-led consortium’s $2.15 billion direct loan to Cambium Learning Group could cause dealmakers to take note. The transaction bypassed banks to refinance existing debt, among other uses. The size of the loan and its direct delivery could signal a new phase of the dealmaking boom: financial sponsors could increasingly turn to direct lending to finance deals.
Direct lending has already undergone a shift, with funds initially targeting sectors seen as more resilient to pandemic effects (software, healthcare, business services). As recently as May, debt investors were warning that deal terms would not price in a full economic recovery. Now, though, credit funds are ramping up activity. The implications for dealmaking are numerous. Private loans well in excess of $500 million are becoming more common, Bloomberg notes, including a $2.6 billion loan to finance Thoma Bravo’s $6.6 billion take private of Stamps.com, announced earlier this month.
“The disintermediation away from the loan syndication market to private credit, particularly for the upper end of the middle market, has been going on for a while now,” Randy Schwimmer, Churchill Asset Management co-head of senior lending, told Mergers & Acquisitions in an interview. “This has been accelerated in the current M&A climate with sponsors requiring more flexibility, speed, and certainty of execution as they compete aggressively to win deals.” Rather than go through a weeks-long bank syndication process that will consume management’s bandwidth and be subject to market volatility, sponsors are opting for private debt on relatively firm terms.
“The competitiveness on the auction front for sponsors has included their credit providers on the financing side,” Schwimmer explains. “To be successful, the syndication process depends on the arranger’s read of the market clearing price. But they also rely on pricing flex in case the market moves. That uncertainty goes away with a private credit execution because the asset manager will hold the whole deal.” This certainty has sparked a bit of an arms race. A growing array of credit funds are increasing fundraising targets to meet surging demand, creating an alternate pathway to secure financing.